When firm behaves badly, whole industry may suffer

By Victoria Fryer

June 4, 2014

When firm behaves badly, whole industry may suffer

UNIVERSITY PARK, Pa. -- The announcement of a firm's misconduct can have a negative effect on the value of other public firms in the same industry due to decreased investor confidence, according to Penn State Smeal College of Business researchers.

Srikanth Paruchuri and Vilmos Misangyi, both associate professors of management and organization, investigated the contaminating effects of one firm's misconduct on "bystander firms" or firms in the same industry that have not been accused of wrongdoing.

"When one firm reveals financial misconduct, a generalization of culpability ensues such that investors worry that all firms in the same industry category as the misconduct firm are also likely to have engaged in similar misconduct," the researchers wrote in reporting their findings in a forthcoming issue of the Academy of Management Journal.

Paruchuri and Misangyi also found that more familiar firms generate a stronger association with bystander firms among investors' perceptions. In other words, bystander firms are more negatively valued based on another firm's misconduct if the offending firm is larger, and therefore more familiar to the investor.

"In the context of investor perceptions of financial misconduct, investors will see those perpetrator firms with which they are familiar as being representative of the industry as a whole, and this familiarity therefore makes the culpability of the perpetrator more potent for generalization," the researchers wrote.